The impact of fiscal and political decentralization on local public investment in Indonesia

Abstract

We investigate the effects of the fiscal, administrative and political decentralization process in Indonesia on budget allocation at the sub-national level. We find that after the large-scale expenditure decentralization of 2001, districts with relatively lower levels of public infrastructure started to invest significantly more in health and physical infrastructure, although not in education infrastructure. At the same time, we also see a tightening of the budget constraint in districts where the democratically elected government heads took over already before gaining fiscal powers. Finally, our results document decreases in public investments under directly elected district heads, showing no beneficial effects of direct elections on investment targeting.